In past recessions, the Fed has played a large role in reviving the economy by sharply cutting interest rates. But Powell has been warning lawmakers that the central bank won’t have much ammunition left to fight the next downturn because interest rates are so low (the benchmark rate is just below 1.75 percent, far below rates above 5 percent in the past).
More government spending is likely to be needed to aid the economy in the next recession.
The Fed chair’s warning comes as the U.S. federal debt has grown by about $3 trillion since President Trump took office, and the president’s latest budget proposal submitted this week would add another $5 trillion to the debt over the coming decade. Economists worry that so much U.S. government debt can dampen private investment by driving investors to buy public bonds instead of private ones.
“A more sustainable federal budget could also support the economy’s growth over the long term,” said Powell, who spent time before he joined the Fed educating Congress about the debt limit as a Bipartisan Policy Center scholar.
Trump blasted Powell, tweeting in the middle of the congressional hearing that the Fed chair was keeping interest rates too high.
“When Jerome Powell started his testimony today, the Dow was up 125, & heading higher. As he spoke it drifted steadily downward, as usual, and is now at -15. Germany & other countries get paid to borrow money. We are more prime, but Fed Rate is too high, Dollar tough on exports,” Trump wrote on Twitter. The Dow Jones industrial average ended the day flat.
The United States has never had a negative interest rate. When asked about that possibility on Tuesday, Powell said that’s "not a tool we are looking at.”
Economists widely view negative interest rates as only worth doing when the economy is in a terrible situation. Trump keeps calling for lower interest rates to further boost growth and the stock market.
For now, the Fed chair does not see any signs of a recession on the horizon. He told Congress that the U.S. economy is in a “very good place” and has remained “resilient” to numerous punches in recent months. He expects growth to remain solid and interest rates to remain at current levels, although he said the coronavirus is a major unknown for the economy.
"We know that there will be some – very likely – be some effects on the United States” from the coronavirus, Powell said, but he was hesitant to predict how big of an impact it will have on the economy.
“I think it’s just too early to say. We have to resist the temptation to speculate on this,” Powell said. He reiterated that the Fed is “closely monitoring” the situation for possible "disruptions in China that spill over to the rest of the global economy.”
Powell stressed to Congress that his concerns for the economy are more long term. In addition to reducing the deficit, he once again said there is a great need to invest in programs to get more people back to work and to boost productivity.
“Finding ways to boost labor force participation and productivity growth would benefit Americans and should remain a national priority,” Powell said.
The share of working-age Americans who are in the labor force is at its highest rate in more than a decade, according to a Labor Department report Friday, but it remains well below most of the nation’s competitors.
Powell’s fairly positive assessment of the U.S. economy was echoed by other Fed leaders this week.
“Policy is in a good place. The economy is in a good place,” San Francisco Fed President Mary Daly said in a speech Monday in Ireland.
Daly was also careful to lower concerns about the effect of the coronavirus on the U.S. economy so far.
“For now I’m watching the coronavirus carefully to see if it has any longer-term effects on the economy or deeper effects than we’ve penciled in right now,” Daly said. “But to date, none of those have materialized.”
Philadelphia Fed President Patrick Harker said Monday that the negative effects on China were “something to watch.”
The U.S. economy is heavily driven by consumer spending, which remains healthy. Other economies are more dependent on trade, which is starting to be affected by the shutdown of many factories in China.